Biopharma deal-making holds up during investor exodus, price disputes

Print 11 November 2016
Cormac Sheridan / BioWorld

COLOGNE, Germany – There are few countries to rival Germany for supplying gloomy gray weather in November. It's always a danger to rely too heavily on pathetic fallacy to describe the state of the biopharma industry, but to delegates arriving at the Koeln Messe Congress Centre for the 22nd annual BIO-Europe Fall meeting, the heavy clouds hanging over the cold waters of the Rhine seemed an apt metaphor for its current prospects.

And, sure enough, those who attended the opening plenary heard some sobering news, even if it is not all bad. Share prices are down as sentiment has turned against the industry following the simmering drug pricing controversies that erupted during the U.S. presidential election campaign.

On the M&A and partnering front, however, it's been a good year – particularly for companies with early stage assets to sell. For preclinical blockbuster deals "it's off the charts," David Thomas, director of industry research and analysis at Washington-based BIO told delegates. Twelve deals with more than $1 billion in biobucks attached were completed so far this year.

His chart of the 10 biggest transactions didn't even include Genentech Inc.'s eye-catching deal in RNA-based cancer vaccines with Biontech AG, worth $310 million in up-front payments and near-term milestones.

For clinical-stage assets, out-licensing activity is slowing – 83 deals worth over $10 million occurred so far, vs. 121 for all of 2015. Aggregate up-front payments – for both clinical and preclinical assets – reached $2.6 billion through October, down on the $7.1 billion and $5.8 billion achieved in 2015 and 2014, respectively. The increasing prominence of preclinical deals is striking, however – they account for a large majority of the $2.6 billion banked by the industry so far this year.

M&A activity has held up well. "What you see is a reasonable level of activity," Thomas said. In dollar terms, it could be the second best year in the past decade, in fact. In terms of market-stage acquisitions – defined as firms with marketed products but sales of less than $1 billion – seven M&A transactions valued at $22 billion occurred during the first three quarters of 2016. Pfizer Inc.'s $14 billion takeover of Medivation Inc., was the standout transaction. Last year, the total reached $32 billion, with Abbvie Inc.'s acquisition of Pharmacyclics Inc. accounting for $21 billion of the total.

For R&D-stage acquisitions, the running total through October is $12.2 billion (excluding contingent value rights), spread across 26 deals. This may represent a reversion to the mean – it's well down on the $26.7 billion generated through 32 deals last year, but is on par with 2011, the second best year of the past decade, when 27 deals brought in an aggregate $15.3 billion.

A BAD YEAR FOR SHARE PRICES, TOO

If the deal-making picture remains bright, it's been the worst year for a decade in terms of share price performance. As of Nov. 3, the Nasdaq Biotech Index was down 24 percent – a worse performance than 2008, when it dropped by 13 percent during the economic crisis.

The big boom is well and truly over – in retrospect it is now clear that it ran from 2012 through 2014, during which years the index rose by 32 percent, 66 percent and 34 percent, respectively. In 2015, the index gained just 11 percent.

Smaller firms are even more badly affected. Shares in emerging U.S. biotech firms are down 39 percent this year, while those of their European counterparts are down by 27 percent. These declines are not correlated with the wider equity markets, Thomas said. The US S&P 500 is up by 5 percent and the European S&P 350 is down by just 3 percent. The number of biotech IPOs is also down, from 40 last year to just over 20 so far this year.

"Follow-on offerings are down 70 percent in dollar terms," he added.

DRUG PRICES SHIFT SENTIMENT

Drug pricing is the primary issue that is weighing on investors and that has shifted sentiment toward the sector, said Thomas. Regardless of the outcome of today's U.S. presidential election, that situation is not going to change anytime soon. Price gouging by generic drugmakers – who do not innovate – are a major part of the problem.

Kate Bingham, managing partner at London-based venture capital firm SV Life Sciences Managers cited a Leerink study, which found that some 400 generic drugs had price hikes of 1,000 percent in recent years. "If they [the politicians] put a lid on that, that's a good thing," she told delegates during the opening plenary.

Another part of the problem in the U.S. is the fragmentation of the payer landscape, she said. Unless the U.S. gets "more joined" up, it is going to be difficult to control costs.

But there is a sense that, regardless of BIO's efforts to persuade law-makers and the public that many of their concerns are not caused by innovative drug developers, the industry is not in control of the argument.

The public – that part of it based in California at least – will have its say on the pricing issue Tuesday. Proposition 61, or the California Drug Price Relief Act, proposes to align state spending on drugs with that of the U.S. Department of Veterans' Affairs, which typically gets access to drugs at a 40 percent discount to Medicare pricing.

"It seems like it's going to go through," Bingham said. "This is going to be a very interesting time politically to see what happens in California and how that influences policy."

Europe is no stranger to drug pricing pressures – it's the default setting for the industry. "The landscape is much more fragmented than the regulatory landscape, and that is a challenge for us," said Joerg Mueller, head of development in the pharma division of Bayer AG, of Leverkusen, Germany. "We don't have a common definition of what constitutes value." But Moeller is not calling for unitary pricing in Europe.

"If you have one price across the board, you take away the ability to differentiate," he said. That is important to ensure access to new medicines in lower income countries, he pointed out.

Uncertainty about pricing is now just another part of the complex matrix that pharma companies need to navigate if they are to bring innovative new products to market – alongside all of the unknowns about what the clinical and wider health care environment will look like 10 to 12 years out, when at least some of those R&D projects getting underway now will eventually see the light of day.

Any doubts that innovation will not be rewarded will be countered by news coming through from London of a major restructuring in the U.K. life sciences investment market. The Battle Against Cancer Investment Trust (Bacit Ltd.), a fund of funds with £500 million in assets, is taking over Syncona LLP, a subsidiary of the Wellcome Trust, in a bid to create an investment firm with £1 billion (US$1.2 billion) assets.

The plan includes a £184.7 million share sale, which is not underwritten. But the Wellcome Trust, the sole backer of Syncona, has already committed £319 million to the venture, which represents the £166 million purchase price of Syncona plus the capital it has already committed to it.

Bacit will also take on all or most of Cancer Research UK's stake in the £70 million CRT Pioneer fund, in which it is already an investor. It will operate under the Syncona name and plans to invest about £100 million per year in U.K. firms, with a minimum 25 percent of the assets being focused on oncology.

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